Losing an ARM and a leg

In the long term, we may regret waving off a rare global technology leader from the UK market…

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Like most shareowners of ARM Holdings (LSE: ARM), Monday began on an exciting note for me.
 
My portfolio was up nicely, and my stake in the microchip designer was the major driver, after the company had agreed to be acquired by Japan’s SoftBank Group for a heady £17 a share.
 
The news sent the shares up 43% the moment they opened.
 
Who doesn’t like to start the week this way?
 
Well, me for one.

I’ll tell you why I don’t like Mondays

Don’t get me wrong – I’m not collecting shares like others collect stamps or Elvis memorabilia.
 
Making money is the aim of the game, and so like any other investor I hope my activities will lead to a wealthier and more secure future.

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Share gains are good!
 
However, I’d have preferred for ARM to stay publically listed – and for what I judge would have been the likely superior gains from it doing so to have come my way across many years.
 
You see, I believe ARM has a potentially huge addressable market in the so-called Internet of Things of the future, which could see ARM-designed chips go into many more devices than just the mobile sector it dominates today.
 
We can never know for sure – and technology is a particularly difficult sector, vulnerable to disruption from new entrants or resurgent competitors – but my personal hunch is ARM would have been trading at levels well above £17 in five or 10 years’ time.
 
ARM shares were fairly volatile, too, which might have given us more opportunities to buy in or top up at a cheaper price along the way.
 
True, ARM’s share price is now up by around 66% since ‘Brexit Day’ – mainly, I believe, because the subsequent weakening of the pound is likely to boost the value of ARM’s overseas earnings when converted back into our deflated home currency.
 
66% is a huge gain in three weeks. Perhaps I seem churlish.
 
Moreover, the multiples of ARM’s profits and sales that SoftBank is paying to gain ownership of the company seem generous.
 
But with investing it usually pays to think about the bigger picture, and while it’s academic here – small investors like you or me have no chance of influencing whether this deal goes ahead – a one-off price pop wasn’t the way I wanted to see my relationship with ARM ended.
 
This company is just too unique for that.

Not made in the UK

Now, some may feel I am being sentimental about ARM. At the end of the day, a share is a share is a share. We shouldn’t fall in love with them. They certainly won’t love us back.
 
But ARM isn’t just a share.
 
It’s a thriving business in a particular sector – technology – where there aren’t many options for UK investors.
 
True, there are some smaller firms like Imagination Technologies (LSE: IMG) and NCC Group (LSE: NCC), as well as a host of software minnows that we can invest in.
 
But ARM was our one indisputable global tech player – a way for UK investors to back a vision of the future with a large-cap share, in a similar way to when you invest in Intel or Apple.
 
On that note, many UK investors do own overseas shares, particular those of the US tech giants, either through relevant funds or directly.
 
Maybe you say having such firms listed at home doesn’t matter in an era when buying overseas shares is so much easier and cheaper than it was.
 
And it’s true – it is far easier and cheaper to own, say, US shares than 10-20 years ago.
 
But it’s still not as easy or as cheap as buying and owning UK shares. There are often extra costs and complications to think about.
 
Also, taking the bigger picture view, the loss of ARM from the public markets will also mean the average UK investor who loyally buys the FTSE 100 index will now be that bit more exposed to the sort of companies that are still heavily represented here – miners, banks, energy firms and low-growth pharmaceutical giants – and that bit less exposed to the technologies of the future. 
 
Again, some might say this is a good thing.
 
While US technology giants have made great gains and headlines over the past few years, markets are cyclical and technology shares can seem to fall from grace more easily than, say, consumer goods firms, as well as getting caught up in extremes of booms and busts.
 
Famed super-investor Warren Buffett, for instance, has steered clear of the sector most of his life. It hasn’t done his returns any harm!
 
However, in recent years even Buffett has dabbled with technology.
 
His vehicle Berkshire Hathaway has acquired a huge stake in IBM, and more recently it’s been buying Apple.
 
Perhaps this is a reflection that technology is now a mature industry – and one that even Buffett can no longer ignore?
 
If so, we UK investors now have one less way to invest in it at home.

ARM-d for the future

If the acquisition of ARM is a loss for UK investors, is it a loss for the UK economy as a whole?
 
Here, I’m less convinced.
 
SoftBank won’t be splashing out £24 billion to acquire ARM with the intention of doing anything to disrupt its new golden goose.
 
When you boil it down, the goose mainly consists of a crew of very smart and well-paid engineers, whose value is realised through a long pipeline of intellectual property that – whilst well established – requires continuous innovation to remain relevant for the long term.
 
Ultimately it’s a people business, and I believe ARM will remain a great employer of UK people.
 
SoftBank has promised as much. It says the headquarters of ARM will remain in Cambridge, and that it will at least double the UK employee headcount in the next five years.
 
I suspect ARM’s plans would have been very similar, but it’s still good to see the likely new owner making such commitments.
 
The government seems to think so, too – perhaps especially so given the uncertain environment post-Brexit.
 
Indeed, the new Chancellor of the Exchequer, Philip Hammond, quickly tweeted to say the deal proves the UK has not lost its global allure and that it remains “open for business”.

Happy Mondays

If I was Mr Hammond I’d be more cautious.
 
The reality is the Japanese Yen, like other major currencies, has soared against the UK pound in the wake of the referendum result.
 
This pound plunge has made UK assets cheaper (and UK citizens poorer) when viewed from the global stage.
 
SoftBank is striking opportunistically with a strong Yen, and it probably won’t be the last foreign company to get its hands on a prime UK business partly on account of our stricken currency.

Further opportunistic acquisitions might mean more happy Mondays to come for UK shareholders – and perhaps more positive tweets from politicians keen to put a positive spin on our economic future.
 
But if we lose more of the jewels in our market’s crown like we’re set to lose ARM, I think we investors will be the poorer for it.

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